Analyst Picks and Pans: JAVA, GS, MS, INTC, LLY

Sun Microsystems (JAVA)

Goldman Sachs removes from Conviction Sell List, upgrades to neutral

According to a Wall Street Journal report, IBM (IBM) is in talks to buy Sun, citing people familiar with the matter. If the deal does go through, which could happen as early as this week, IBM is likely to pay at least $6.5 billion in cash, the people said, which would translate into a premium of more than 100% over Sun's closing price Tuesday.

Goldman analyst David Bailey upgraded Sun shares as the IBM news will undoubtedly outweigh Sun's fundamental issues in the near term, reversing the risk/reward in the shares. Bailey notes his Conviction Sell call was predicated on Sun as a stand-alone company. He says his fundamental thesis that Sun is cyclically and secularly disadvantaged vs. its main competitors remains intact.

Regarding the Journal story, Bailey would question the short-term and longer-term benefit to IBM from a potential combination.

Morgan Stanley (MS)

Goldman Sachs Group (GS)

William Blair & Co. issues earnings forecasts

Morgan Stanley should remain solidly profitable in the first quarter, but Goldman Sachs will likely emerge as a much more aggressive player in a field that has shrunk considerably in the past year, according to a William Blair & Co. analyst.

In a note to clients Mar. 18, analyst Mark Lane said both companies have managed well so far in 2009 compared with their commercial bank peers, given their limited exposure to consumers.

"We believe it has become clear that these investment banks recognized and acknowledged their issues long before their large, commercial bank peers," Lane wrote, adding that their moves to become bank holding companies and their participation in the government's capital purchase program have been positives.

Lane expects both companies to report improved trading results, given less competition in the field. However, he foresees Goldman Sachs emerging as more aggressive than Morgan Stanley, "which seems to have embraced a much more conservative operating model," he said.

As a result of their change in status to bank holding companies, both Morgan Stanley and Goldman Sachs will move to a calendar year-end from a Nov. 30 fiscal year-end. The companies plan to release December 2008 results along with their 2009 first-quarter results.

Lane expects Morgan Stanley to report a loss of 84 cents per share for December. He established a 25 cents-per-share estimate for the first quarter, and raised his full-year estimate by 15 cents to $2.25 per share. Lane sees Goldman posting a loss of $1.57 per share for December; earnings of $1.56 per share for the first quarter; and earnings of $8 per share for the full year.

Intel Corp. (INTC)

Needham & Co. upgrades to buy from hold

Analyst Y. Edwin Mok says Intel should be able to keep prices and its mix of products stable, helping to improve profit margins in the second quarter.

"Recent checks suggest orders are tracking better than expected" as personal computer makers and retailers have begun replenishing inventory levels, Mok wrote in a note to clients Wednesday. Electronics makers sharply reduced orders at the end of last year to cope with falling demand.

He said the pickup in orders is probably not a reflection of any turnaround in demand from consumers for electronics, but he said the trend should help Intel meet its quarterly sales target of about $7 billion.

Eli Lilly & Co. (LLY)

Citi Investment Research raises shares to buy from hold

Analyst John Boris says Lilly will be able to launch its blood thinner Effient in the second quarter of this year, and predicting annual sales of about $2 billion by 2015. Boris said Effient will get broad approval from the FDA, and he believes the drug will be more expensive than market leader Plavix. He increased his target price to $41 per share from $36.

Boris said concerns about the launch and sales of Effient have eroded the share price over the last six months. A patent challenge to the osteoporosis drug Evista has also pressured shares, he wrote in a Mar. 18 note.

Because clinical trails showed Effient was more effective than Plavix at reducing blood clots, Boris estimated the drug could be priced at $5 to $5.15 per day, compared with $4.36 a day for Plavix, the world's best-selling blood thinner and second most popular prescription drug by sales.

Boris raised his 2009 profit estimate for Lilly to $4.20 per share from $4.15.

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